By Karen Brettell
NEW YORK, Dec 26 (Reuters) - The Japanese yen softened against the greenback on Friday as investors remained on watch for potential intervention to shore up the currency, while the dollar dipped slightly against the euro in thin trading volumes.
The yen has remained on the back foot despite a Bank of Japan interest rate hike last week, on concerns about expansive fiscal policy in the country.
Japan's government on Friday proposed record spending for next fiscal year while curbing debt
issuance, underscoring Prime Minister Sanae Takaichi's challenge in boosting the economy while inflation remains above the central bank's target.
Data on Friday also showed that core consumer inflation in Japan's capital slowed in December on moderating cost pressure for food but stayed above the central bank's 2% target, firming the case for further interest rate hikes.
Bank of Japan Governor Kazuo Ueda said on Thursday the nation's underlying inflation is accelerating gradually and steadily approaching the central bank's 2% target, reiterating the central bank's readiness to continue raising interest rates.
The yen has come off its recent lows, however, as Japanese officials warn about potential intervention.
Japan has a free hand in dealing with excessive moves in the yen, Finance Minister Satsuki Katayama said on Tuesday, issuing the strongest warning to date on Tokyo's readiness to intervene in the currency market to arrest sharp declines in the currency.
Against the Japanese yen, the dollar was last up 0.42% on the day at 156.44.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro,rose 0.02% to 97.96, with the euro up 0.04% at $1.1782.
Sterling weakened 0.14% to $1.3504.
The greenback has weakened this year as investors price in further Federal Reserve rate cuts while other central banks are expected to hold rates steady.
Fed officials are balancing a weakening labor market against concerns about inflation that continues to run above the central bank’s 2% annual target.
Fed funds futures traders are pricing in between two and three 25 basis point cuts next year, with the first possible in March.
In cryptocurrencies, bitcoin gained 0.50% to $88,288.
(Reporting by Karen Brettell, Editing by Louise Heavens)
